How Competitive Markets Work

Question 1

Explain what is meant by a market and by sub-markets?

Answer 1

A market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange
A sub-market is a geographic, economic, or specialised subdivision of a market

Question 2

What is the relationship between individual and market demand?

Answer 2

The market demand curve is made up of all the individual demand curves for a good. In general, the higher the price of an item, the less an individual consumer will buy.
Microeconomics is concerned with smaller-scale individual consumer behavior.

Question 3

What is meant by derived demand?

Answer 3

Derived demand is an economic term that refers to the demand for a good or service that results from the demand for a different, or related, good or service.

Question 4

What is meant by joint demand?

Answer 4

When you need two goods because they work together to provide a benefit for the consumer

Question 5

What is meant by composite demand?

Answer 5

The situation when a particular type of good is used to produce more than one type of product

Question 6

What is meant by competitive demand?

Answer 6

Occurs when there are alternative services or products a customer can choose from

Question 7

Relationship between price and quantity demanded using marginal utility theory?

Answer 7

Suggests that as more of a product is consumed the marginal (additional) benefit to the consumer falls, hence consumers are prepared to pay less

Question 8

Relationship between price and quantity using the income effect?

Answer 8

How the change in the price of a good can change the quantity that consumers will demand of that good and related goods, based on how the price change affects their real income

Question 9

Relationship between price and quantity using the substitution effect?

Answer 9

The decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when it’s price rises

Question 10

What is the difference between an extension along the demand curve and the contraction?

Answer 10

Extension - it results in a downwards movement along the demand curve
Contraction - it results in upwards movement along the demand curve

Question 11

What are the determinants of demand?

Answer 11

1) Tastes and Fashion
2) Price of a good
3) Price of other goods
4) RDI

Question 12

What are the determinants of supply?

Answer 12

1) Costs of production
2) Government policy(subsidies and tax)
3) Technology
4) Price of other goods

Question 13

What is meant by consumer surplus?

Answer 13

A consumer surplus happens when the price that consumers pay for a product or service is less than the price they’re willing to pay. It’s a measure of the additional benefit that consumers receive because they’re paying less for something than what they were willing to pay.

Question 14

How does a change in price affect consumer surplus?

Answer 14

An increase in the price will reduce consumer surplus, while a decrease in the price will increase consumer surplus

Question 15

The relationship between individual and market supply?

Answer 15

Individual supply - represents the quantities supplied, at different prices, by an individual firm or producer
Market supply - represents the aggregate quantities, supplied at different prices, by all the firms or producers

Question 16

What is meant by joint supply?

Answer 16

A situation where an increase or decrease in the supply of one good leads to an increase or decrease in supply of another

Question 17

What is meant by composite supply?

Answer 17

When two or more goods and/or services are combined to make a bundle

Question 18

What is meant by competitive supply?

Answer 18

Term used to describe a situation where more than one product can be produced from the same factors of production

Question 19

Relationship between price and quantity supplied?

Answer 19

A higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied

Question 20

Extension along the supply curve?

Answer 20

A rise in price, ceteris paribus, leads to a rise in supply.

Question 21

Contraction along the supply curve?

Answer 21

A fall in price, ceteris paribus, leads to a fall in supply

Question 22

What is producer surplus?

Answer 22

It is measured as the difference between what producers are willing and able to supply a good for and the price they actually receive.

Question 23

Explain how the changes in the price will affect producer surplus?

Answer 23

As the equilibrium price increases, the potential producer surplus increases. As the equilibrium price decreases, producer surplus decreases

Question 24

How do supply and demand determine market equilibrium?

Answer 24

If demand increases and supply remains unchanged, then it leads to a higher equilibrium price and higher quantity. If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity

Question 25

Causes and consequences of disequilibrium?

Answer 25

Could occur if the price was below the market equilibrium price, causing demand to be greater than supply, and therefore causing a shortage. Can occur due to factors such as government controls, non-profit maximising decisions and ‘sticky’ prices

Question 26

Why the price and output of some goods and services may be volatile?

Answer 26

Prices of basic energy (natural gas, electricity) are generally more volatile than prices of other commodities. One reason that energy prices are so volatile is that many consumers are extremely limited in their ability to substitute other fuels when the price of, natural gas for example, fluctuates.